Author Question: Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an ... (Read 135 times)

plus1 · **on:** Jun 29, 2018

Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

What will be an ideal response?

Question 2

Explain why opportunity cost is the best forgone alternative and provide examples of some opportunity costs that you have faced today.

What will be an ideal response?

frejo · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

If the economy is experiencing inflation, it is currently at point A, beyond potential real GDP. A contractionary monetary policy will shift the aggregate demand curve to the left from AD1 to AD2, decreasing real GDP and the price level until it reaches potential real GDP at point B.

Answer to Question 2

When a decision to undertake one activity is made, often many alternative activities are no longer possible. Often these activities are mutually exclusive so only the highest valued alternative is actually forgone. For instance, the decision to go to a student's 8:30 AM class eliminates the possibility of sleeping in during the hour and of jogging during the hour. But in this case, it is impossible to both sleep in and to jog during the hour, so the opportunity cost cannot be both activities. What is lost is only the activity that otherwise would have been choseneither sleeping in or joggingwhich is whatever activity would have been chosen, that is, the most highly valued of the forgone alternatives. For students, attending class, doing homework, studying for a test are all activities with opportunity costs.